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"Sustaining Asia's Prosperity: Prospects and Opportunities"

Address by
Liqun Jin
Vice President, Operations 1
Asian Development Bank

At the Confederation of Spanish Employers (CEOE)

4 March 2008
Madrid, Spain

I.  Introduction

I would like to thank the Confederation of Spanish Employers - CEOE - for organizing today's seminar, and Mr. José María Lacasa Aso, Director of International Relations, for his very kind introduction. And thanks to all of you for joining us this afternoon.

It is a pleasure for me to be in Madrid just a few weeks before the city will host the 41st Annual Meeting of the Asian Development Bank. We are very much looking forward to the event. It will be the first time in the 21-year partnership between ADB and Spain that we will have the privilege of meeting in your country. The Government of Spain, the City of Madrid and the organizing committee are putting the arrangements in place, and I am confident it will be a great success. Of course, what will make it even more delightful is the warm hospitality of the Spanish people and the beauty and rich history of magnificent Madrid.

This Annual Meeting will also give us the opportunity to share our insights on Asia with decision makers from all sectors in Europe and around the world. We hope to convey that, although the Asia and Pacific region has done exceedingly well in recent decades, there are still huge development challenges ahead. It is, in fact, a critical moment in history for the region.

Many of Asia's challenges are also global challenges, such as environmental degradation and climate change. These must be tackled in partnership with developed countries around the world, civil society, the development community and the private sector. The good news is that Asia is also a land of tremendous opportunity for all parties, including private companies. I will talk a bit about those opportunities in a few moments. But first, let me give you an overview of the Asian economy today.

II.  Economic Prospects and Policy Challenges

We are all aware of the stunning growth that has spread since the post- World War Two era from Japan to the so-called "Asian Tiger" economies of Hong Kong, Taipei,China, Korea and Singapore; from the economic miracles in Malaysia, Thailand, and Indonesia to China, India and Viet Nam. The Asia and Pacific region has become a major contributor to global prosperity, and has done well in terms of raising standards of living at home. Today, Asian people are healthier and increasingly more prosperous. The number of people living in absolute poverty, defined as an income of $1 a day or less, has declined from over 920 million in 1990 to about 600 million today.

Despite this progress, there are still more than 1.5 billion people living below the $2 a day poverty line. Continued rapid growth, while not the only requirement, is a prerequisite for generating economic opportunities and providing resources to tackle the myriad problems associated with poverty.

But whether or not the recent high rates of growth be sustained is a particularly pertinent question in the current global economic environment. It is our view that the economies of emerging Asia will continue to grow strongly, but at a somewhat slower pace in 2008 than in 2007. The International Monetary Fund has also suggested that the impact of a US slowdown on emerging Asia is limited due to strong expansion by China and India.

However, the regional economy is not totally immune to global market turbulence and negative developments. The US economy exerts significant influence on the global business cycle, including both Europe and Japan. Thus, a deep and prolonged US recession, particularly if it were to turn global, could indeed be accompanied by much slower growth in Asia.

The G3 economies - the US, Europe and Japan - are still very important to emerging Asia's export growth, accounting for nearly 42% of the region's total exports. While intra-regional in Asia is growing, evidence suggests that a substantially large portion of this intra-regional trade caters to external demand. So taking into account the share of intraregional trade that is ultimately destined for the G3 economies, the share of G3 markets in the region's total exports rise to over 60%.

Besides the impacts on trade, global financial linkages are strengthening. Emerging Asia's stock markets tend to follow the US market closely. As stock markets in the region have grown and become open to foreign investors, stock prices have become more sensitive to global financial shocks. And Asian economies have become more exposed to swings in stock prices through the balance sheets of both households and their financial institutions.

Fortunately, the exposure of Asian banks to US subprime mortgages and related credit products has been, so far, limited and small relative to the size of their total assets. Banks in many emerging economies in Asia have virtually no direct exposure. Banks in China, Korea and Singapore have reported a bit more significant exposure, although this still represents less than 5% of total equity for most.

Despite this, spillovers from US and, eventually G3, financial markets could be potentially large. As we saw from the rapid transmission of financial volatility during the recent market sell-offs, the region is vulnerable to disruptions in the global financial system. With trade, investment and financial linkages to global markets still high, potential spillovers from a further tightening in global credit markets and a slowing in the US and global economy do pose a significant risk to the regional economic outlook.

Given these risks, Asia's policymakers need to take the steps necessary to ensure confidence in the region's financial markets. They must continue to pursue sound macroeconomic management, strengthen prudential supervision of financial institutions, and improve structural resilience through deeper and more comprehensive reform efforts.

Fortunately, the region has built substantial buffers against external shocks since the 1997-98 financial crisis, through accumulation of large foreign exchange reserves, reduction of short-term external debts, bank and corporate restructuring, and shifts to less rigid exchange rate regimes. Improved fiscal positions and generally benign inflation also allow some room for extra stimulus, if necessary. It will be important for emerging Asian economies to expand domestic demand. In several countries, investment demand has not adequately recovered since the financial crisis. In other countries, like China, consumption demand remains subdued. Broad-based policy efforts are necessary to ensure that future growth in emerging Asia is better balanced in terms of its domestic and external components.

III.  Asia's Infrastructure Needs

Another daunting challenge in the Asia and Pacific region is the huge infrastructure gap. It is estimated that the region will need to invest about $3 trillion over the next ten years to meet infrastructure demands. At current rates, however, less than half of such demands will be met. Today, more than half a billion Asian people have no access to safe water, and three times as many live without proper sewage and waste disposal. Access to paved roads, electricity and other services is uneven, and rapid urbanization is putting a serious strain on infrastructure services in Asia's cities. Before the financial crisis ten years ago, a large portion of domestic savings was channeled toward infrastructure development. Unfortunately, after the crisis, both public and private infrastructure investment dropped off dramatically and today developing countries spend an annual average of just 3% to 4% of GDP on infrastructure. At these rates, the Asia and Pacific region will take about half a century to reach industrialized world standards.

In recent years, the unbundling of large monopolistic infrastructure services has begun attracting attention from the private sector. However, the private sector still accounts for only about 20% of infrastructure spending, while 70% comes from public funding, and the remaining 10% from Official Development Assistance.

To improve on this, developing countries need to translate macro-level investment needs into projects that are well planned, financially viable and prepared to international standards. They also need to create an enabling environment that assures investors of predictability, a level playing field, low transaction costs and fair rates of return commensurate with the risks they take. ADB is working with governments to pursue such reforms and improve transparency.

We are also working with developing Asian economies to improve the region's financial system. Regional capital markets, harmonized rules and regulations, and innovative solutions must be fostered and adopted to increase infrastructure investment in Asia. For example, the ADB-supported Asian Bond Markets Initiative, or ABMI, was designed to facilitate access to the market by a wide variety of issuers, and to create an environment conducive to developing bond markets, both domestic and regional. While there is some growth in infrastructure financing through bonds, more needs to be done to provide appropriate instruments that better match the profiles of infrastructure project investments.

Innovative ways should also be found to mobilize Asian savings for Asian investment. A portion of the region's large foreign exchange reserves, for example, could potentially be mobilized for investment in infrastructure. Although there are sensitivities surrounding this approach, it is worth further discussion given the substantial benefits such investment could bring to Asia and the world.

V.  ADB Working with the Private Sector

In addition to its public sector operations, ADB finances critical development projects in the private sector. We provide hard currency loans, equity investments, financial and political risk guarantees, syndication arrangements and cofinancing, and technical assistance. Our aim is to promote an enhanced investment climate and financial environment for the private sector. New sources of debt and equity financing, institutions that promote more stable and liquid bank and capital markets, and new contractual structures and better risk sharing are all important to this goal. We also facilitate public-private partnerships, which are crucial in the infrastructure sector.

Last year, our private sector operations totaled $1.7 billion. About 44% of that total was for infrastructure projects, 36% for the financial sector, and 17% for funds and capital markets. As Asia grows and develops, our emphasis on private sector and PPP projects is also growing. We are particularly promoting investment in renewable energy generation projects, energy efficiency enhancement projects, wastewater and solid waste treatment projects, energy transport systems among others, to conserve natural resources and improve the quality of life in developing Asian countries.

In trade, our Trade Finance Facilitation Program promotes the growth of regional and international trade, especially in support of the poorer countries in the region. The program works in partnership with private sector financial institutions by sharing risk in challenging markets.

Today we have private sector operations in 20 of our developing member countries, and our track record in major markets such as China, India, Pakistan, Philippines and Indonesia is well established. We are now moving into some of the most challenging of markets for the private sector, such as Afghanistan, where we have made five private sector interventions to date. And last year, we expanded our private sector support into a larger geographical area. For instance, we provided $8.0 million for a power transmission project in Cambodia; $25 million to the Bank of Georgia for on-lending to small and medium-sized enterprises; and $4.5 million to a finance leasing company in the Maldives to fund small and medium sized clients. We also approved a $25 million loan to a bank in Viet Nam for residential mortgage lending activities - our first private sector approval in Viet Nam in five years.

VI.  Opportunities in Developing Asia and the Pacific

Given the high levels of business acumen and expertise in this room, I encourage all of you to consider Asia and the Pacific, particularly to meet some of the needs I have highlighted today. Development projects in Asia need experienced financial advisors, technical consultants, construction contractors, equipment suppliers, operations management companies, equity investors and lending institutions to succeed. There are opportunities in all areas of power generation, transmission, distribution and energy efficiency (and particularly renewable power such as wind, hydro, biomass, etc.). There is a great need in the energy sector, including pipelines and LNG terminals; in water and waste management projects; in the transportation sector from ports to airports to airline systems to roads and rail systems; in mining sector projects; and in telecommunications, particularly rural telephone services. And of course there is a need for financial sector services, from banks to funds to leasing companies and mortgage finance providers.

I am happy to say that we are already in partnership with some major Spanish companies to develop projects such as hydropower in Pakistan and a new cement plant in Bangladesh. We are also in discussion with a few Spanish companies that are looking to enter or expand their operations in India in the urban infrastructure and renewable energy segment. These are very encouraging developments, and I hope only the beginning of a renewed and larger presence in Asia for Spain's private sector firms.

In closing, I believe that Asia's tremendous potential, if fulfilled, will benefit not only the Asian people through continued poverty reduction, but also the world through continued and growing contributions to global prosperity and stability. The private sector within Asia and around the world has a very important role to play, and ADB can help facilitate the private sector's engagement. Working together, we can all contribute to a more balanced and equitable global development process to achieve a steady improvement in the quality of life for all.

Thank you, and I look forward to hearing your questions and comments.